Alcor Swap V2: Why Concentrated Liquidity Will Change The Game
The popular DEX has introduced a huge update, bringing next-gen liquidity to Antelope-based chains – but how does this new system work?
This article is sponsored by Alcor.
The future of DeFi on Antelope is here!
Alcor, the popular multi-chain decentralised exchange (DEX), has unveiled Alcor Swap V2, coupling an updated UI and a host of new features with the introduction of Concentrated Liquidity, which makes getting involved in liquidity pools on Antelope blockchains – such as WAX, EOS and Proton – easier, more efficient, and more rewarding than ever.
Let’s dive into the changes, and how it all works!
What is a Liquidity Pool?
First, a quick primer on how a DEX works. A liquidity pool is a collection of tokens, staked into a smart contract, which facilitates trade between one token and another. This is the core of what’s known as DeFi, or decentralised finance.
Liquidity pools typically work in token pairs. The most popular pair on Alcor is WAX/TLM (AlienWorlds), with over $100,000 in value exchanged every month!
For example, let’s say Person A wants to exchange 50 WAX for the equivalent in TLM. This exchange doesn’t create any TLM; it has to come from somewhere, hence a liquidity pool of WAX and TLM tokens is needed.
The tokens within a liquidity pool can be staked by anybody; DAOs, collections, or people like you and me. In exchange for staking tokens into the liquidity pool, the staker – known as a liquidity provider – will receive token rewards, and a cut of any fees gathered through the use of their tokens.
What’s wrong with traditional Liquidity Pools?
One of the biggest problems with traditional liquidity pools is that, for the rewards to be worthwhile, the liquidity provider must stake a large amount of tokens. As the value of tokens can fluctuate wildly, this creates a lot of risk, and large, unpredictable losses can occur.
Alcor’s new Concentrated Liquidity feature aims to fix this.
Traditionally, tokens are staked across the entire price range of a liquidity pool. Using the above example, if Person B staked 1,000 TLM into the WAX/TLM pool, it could be used in an exchange for 250 WAX. Or 100 WAX. Or 500 WAX. These fluctuations in token price could mean the difference between a liquidity provider earning tokens, or taking losses.
What is Concentrated Liquidity?
Concentrated Liquidity allows tokens staked in a liquidity pool to only be used within a specified price range. When the token price is within that range, those staked tokens will accumulate trading fee rewards, proportional to the liquidity provider’s contribution. This makes providing liquidity less risky, far more efficient, and offers more liquidity for traders.
In a simple example, take a USDC/USDT liquidity pool – two stablecoins, which should both be worth $1.00. Using Concentrated Liquidity, a liquidity provider can choose to stake their tokens to only be used in the price range of $0.99 to $1.01. This gives traders more liquidity around the average price, and earns the liquidity provider more rewards.
Alcor’s Concentrated Liquidity system is capable of supporting steps in price as low as 0.05%, making it 4,000x more efficient compared to traditional liquidity pools!
What other features does Alcor Swap V2 have?
Concentrated Liquidity may be the star, but a host of other features have made their debut with Alcor Swap V2:
- Range Orders: allows liquidity providers to deposit a single token within a price range above or below the current market price. Once the market price enters this range, one token is sold for the other along a smooth curve, earning swap fees
- Fee Tiers: allows liquidity providers the opportunity to increase or decrease their commission percentage, depending on the level of risk they’re willing to take
- On-Chain Price Oracles: the creation of time-weighted average price (TWAP) Oracles, a decentralised solution to providing token prices to the blockchain
- IBC Bridge: allows users to bridge tokens between EOS, Telos and UX Network with no fees
More information on these features can be found via Alcor’s Medium announcement.
The arrival of Alcor Swap V2 heralds a new dawn for DeFi on Antelope-based blockchains, akin to the arrival of Uniswap V3 on Ethereum.
This update gives liquidity providers more freedom, more options, and more creativity, allowing them to fine-tune their strategies to maximise returns. On the flipside, the update also gives traders the benefit of deeper liquidity pools, facilitating larger token trades and the opportunity to benefit from reduced variation between expected price and trade price.
Alcor has been the most beloved DEX for the WAX, EOS, Proton and Telos communities since its inception, and with $6bil+ in trades from 40mil+ exchanges to date, it’ll only get better from here. Head to alcor.exchange and try out Alcor Swap V2 for yourself!